The early results from the 2015 dairy profit monitor are presented on page 15. The key trends are a decline in gross output by 18% due to the fall in milk prices. Variable costs declined by 10%, while fixed costs declined by 14%. The net result of this was a 27% decline in net profit per litre from 17.33c/litre in 2014 to 12.70c/litre in 2015.

I was at a discussion group meeting during the week and the figures presented for 2015 closely resembled the profit monitor data. Despite a huge lift in the volume of milk sold, up about 25% on last year, the gross margin, total costs and net profit for the group were all well back on 2014 figures.

While the fall in milk prices was largely to blame for the drop in gross output, the extra milk produced had the effect of diluting costs. For the group, the total amount of money spent on costs was more or less the same as the previous year, but when compared on a cent-per-litre basis, the costs fell because more milk was produced.

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Because most of the group held back production in 2014 in the run-up to quota abolition, the total amount of variable costs didn’t change between 2014 and 2015 as the cows still had to be fed, fertiliser had to be spread and silage had to be cut.

So even though extra milk was produced in 2015, it did not cost much more to produce than it did in 2014. The group included a value of €30,000 per farmer as a charge for own labour employed in the business.

So the main reason for the drop in costs was more to do with more milk produced rather than any great technical improvements in cost savings or lower input prices.

The group also looked at the net cash figure by deducting the money spent on tax, capital repayments and capital expenditure from the net profit.

The cash figure, after deducting the inventory change and adding back the depreciation, is what is left for personal drawings at the end of 2015.

This is the true measure of profitability and it really showed the farmers who were performing best and it also showed those who had a poor structure, whether it was around taxation or debt management.

Comparing net cash on a per-hectare-farmed basis is a really good exercise. Long-term leasing land (tax free) has an opportunity value of about €500/ha, depending on local land rental prices. If you are not making this, questions need to be asked.

2016

After discussing the 2015 performance, group members then discussed their budgets for 2016.

A few members spoke about how extra milk production in 2016 would dilute costs further, as they were planning to increase their stocking rate and milk more cows.

Some of the group members were planning to increase stocking rate on the milking platform to over three cows/ha.

For me, this is a risky strategy. Yes, fixed costs will be diluted with more milk produced, but what will happen to variable costs? There is absolutely no point in producing more milk to dilute fixed costs if the variable costs go up as a result.

Higher stocking rates are fine on farms growing high volumes of grass. As a rule of thumb, you should be growing about 5t of grass/ha for every cow you intend to carry on the milking platform. This can be stretched a bit further if most of the silage is coming in from outside the milking platform.

High stocking rates on farms not growing high volumes of grass means only one thing – higher variable costs as extra feed needs to be brought in, extra silage needs to be made and any gains in increased output can quickly be eroded.

There are plenty of examples of this from around the world, so be careful if planning extra production again next year. The reduction in variable costs in 2015 could be just a one-off due to higher supply, very favourable weather and grass growth.